Mr Chan is part of a company’s senior management. In the course of his role, he came upon information and a lucrative commercial opportunity that the company could exploit. He neither disclosed this nor obtained the company’s consent. Instead, armed with that information, he resigned, set up his own company and exploited that opportunity.

Can he do so without contravening any law?

The plain answer is "No". Section 218(1) of the Companies Act 2016 forbids this unless he obtains the consent or ratification of a general meeting.

The board’s consent alone is insufficient.

This prohibition reflects strict judicial rules preventing directors and senior officers of the company’s management from breaching their fiduciary duties.

Three important rules determine whether a director has breached his fiduciary duty by taking profits that the courts regard as belonging to the company.

Firstly, the "no-profit rule". A director cannot profit from his position. If he does so, he must account to the company for such profit. Good faith is no defence, nor is the fact that the company could not have earned the profit itself, if he entered the transaction by reason of his fiduciary office. It is immaterial that the company suffered no loss and may even have benefitted.

Secondly, the "no-conflict rule". A director cannot enter into an agreement where his personal interest will conflict with the company’s. This duty is breached even without a fraudulent motive. He cannot avoid liability by claiming that he made no profit, that the company suffered no loss or that the contract was fair. The agent (director) must yield his gains to his principal (company) if there is a real and sensible conflict of interest and duty.

Thirdly, the "misuse of trust and knowledge rule". A director cannot use, for his personal benefit, information about the company’s financial position or an opportunity belonging to the company that came to his knowledge in his capacity as a director. He must disclose to the company any contract awarded to him personally.

Even the company’s inability to exploit the information or opportunity is irrelevant. The strictness of this rule is seen in an English case, Industrial Development Consultants Ltd v Cooley [1972]. The managing director feigned illness, resigned and secured for himself a contract the company had been pursuing. Although Cooley was told the company could not have won the project anyway, he still had to account for the profit. As managing director, he had breached his fiduciary duties.

The answer lies in the nature of the fiduciary relationship. A director is not merely an employee with a contract. He is entrusted with the company’s assets, information and opportunities. That trust is not conditional on the company being able to exploit them.

The rationale is simple. The law guards against potential conflict, not just actual conflict. If a director can take an opportunity the company has declined, what stops him from manoeuvring the company into declining it? This rule eliminates the temptation. Even if the company’s decision to reject an opportunity is honest, the director’s subsequent exploitation puts his interests at odds with the company's. The law acts prospectively without waiting for harm.

At common law, if a company or its independent board rejects a business venture after a director’s full disclosure, the director may use the opportunity for his advantage. 

In Malaysia, however, section 218 requires the consent or ratification of a general meeting, not merely the board. The common law exception is not available since section 218 is the prevailing statutory position. 

This rule is commercially rigid. For a listed company, convening an extraordinary general meeting (EGM) to ratify a director’s personal exploitation of a corporate opportunity is considerably impractical. The cost is significant. Opportunities also do not wait for an EGM’s notice period.

The current position protects the company. However, a legitimate case can be made for some reform to the rigour of the prohibition.  

The Supreme Court of Canada adopted a more flexible, fact-sensitive approach: neither the "no-conflict" rule nor the "no-profit" rule should exclusively determine liability. To ascertain whether it was fair for a fiduciary to appropriate a business opportunity that he undertook at his own expense and risk, the court considered his position or office, the nature, ripeness and specificity of the opportunity, the knowledge possessed and the circumstances in which it was obtained (Canadian Aero Service Ltd v O’Malley [1974]). 

This test is more nuanced and commercially sensible.

A report can be made to the Companies Commission of Malaysia (SSM), although this is not mandatory unless the conduct is fraudulent. If the SSM investigates, prosecutes and secures a conviction, the director or officer may be imprisoned for up to five years, fined up to three million ringgit or both. Under Section 38A(1) of the Companies Commission of Malaysia Act 2001, the Registrar may, with the Public Prosecutor’s written consent, compound the offence at up to half the maximum fine. Separately, the company may bring a civil claim for an account of profits.

In short, section 218 imposes a rigid standard that protects companies but discourages honest directors from pursuing legitimate opportunities. A more flexible, fact-sensitive approach would better balance fiduciary loyalty with commercial reality.

Philip T N Koh is an advocate and solicitor of the High Court of Malaya and adjunct professor of Universiti Malaya and the School of Business and Taxation, Monash University Malaysia.

Soh Zoe Lynn is an undergraduate at the Faculty of Law, Universiti Malaya, and was formerly an intern at Messrs Mah-Kamariyah & Philip Koh.